So you know your credit score—that's great. But do you know how it affects your chances of being approved for a home mortgage? Banks and other lenders use the credit score to evaluate the likelihood that a borrower will be able to repay a debt. The common score used in the United States is the FICO score, ranging from 300 to 850, with a higher number indicating greater creditworthiness. Typically, lenders look for a credit score in excess of 620 when approving a borrower for a home mortgage.
Bad Payment History
Another significant factor that mortgage lenders look at when considering a borrower's application is payment history. Any past bankruptcies, foreclosures, repossessions, liens, court-ordered judgments, or late payments can cause a mortgage application to be denied.
No Job or Poor Employment History
If you don’t have a job, or if your employment history has large, unexplained gaps, lenders may be reluctant to approve a mortgage. Similarly, people who are new to the workforce or self-employed individuals may have a harder time getting a mortgage approved.
Too Much Debt
No Credit History
The length of your credit history—also known as “time in file”—can have an impact on mortgage decisions. Factors that come into play include the average age of any credit accounts and the age of your oldest credit account. People with an older credit history may have an easier time getting a loan than those with brand-new credit.
No or Too Low Down Payment
Not Enough Collateral
Your prospective home may not be worth what you think it is. Just because you are willing to offer a certain amount for a home doesn’t mean the bank will actually give you a mortgage for that amount. The collateral value of a home, which is what the mortgage is based upon, is determined by an independent appraisal and comparable sales in the area.
Problems with the Property
You may have an excellent credit score, history, and income but still be denied a mortgage through no fault of your own. Problems with the home or property—prior liens, location in a flood zone, conservation easements, local zoning issues, lack of a clear title, court judgments, and other issues—could cause a lender to deny your application.
Mistakes on the Application
It goes without saying that lying and fraud are big no-nos on mortgage applications. But you should also be very careful to dot every “i” and cross every “t” on your application, and make sure that you can verify the information that you provide. Keep complete and accurate records of all your income, assets, and debts.
Be forewarned and forearmed as you head into the mortgage process.
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